The Complete eCheck Payment Guide
In an age of chip cards, cryptocurrencies, and digital wallets, the word “check” seems woefully outdated. Frankly, even sticking a little “e” on the front of the word doesn’t improve matters much. If you’re like me, your own paper checkbook sits in the back of a drawer or the bottom of a bag, begrudgingly retrieved only as a last resort. If you’re young enough, perhaps you’ve never even owned a physical checkbook (you lucky little spring chicken, you).
So, why an echeck processing guide? Well, echeck processing is actually still a viable and quite important payment acceptance option for many merchants. eCheck payments offer several distinct advantages over traditional paper check payments but also over card payments as well. In fact, many businesses can’t really afford not to offer electronic check payment acceptance as an option.
In this guide, we’ll start with the basics of echecks — explaining exactly what they are and how echeck processing works. We’ll also delve into why you might consider accepting echecks at your business, as well as provide some direction on how to get started.
Table of Contents
- What’s An eCheck?
- eCheck VS ACH: What’s The Difference?
- Advantages To eCheck Payment Processing
- How To Accept eCheck Payments
- How Much Does eCheck Processing Cost?
- eCheck Processing Time
- Final Thoughts: Are eCheck Payments Right For Your Business?
What’s An eCheck?
An echeck, or “electronic check,” provides a mode of funds transfer between banks that does not involve card networks. If you’ve ever received a paycheck or tax refund by direct deposit into your bank account, you received an echeck for those funds.
When discussing echeck payment acceptance by small businesses, we’re usually referring to the transfer of payment from your customer’s bank account to your business bank account. To initiate an echeck payment, a customer must be willing to provide bank account information, but the way the merchant interacts (or doesn’t interact) with that information directly varies by business type and situation.
An echeck may begin with a physical paper check, but it doesn’t have to. As long as the bank account and payment information is provided and is eventually transmitted electronically, the payment counts as an echeck payment.
eCheck VS ACH: What’s The Difference?
The terms “echeck” and “ACH” are often used synonymously. This is because, in the United States, most echecks ultimately pass through the ACH (Automated Clearing House) Network. Through this network, large volumes of electronic bank transfer transactions are batched and processed for consumers, businesses, and governments. The ACH Network operates by the rules set out by NACHA (formerly the National Automated Clearing House Association), while the Federal Reserve and the Electronic Payments Network (EPN) act as ACH operators. ACH processing has been in place since the 1970s.
For more information on the ACH system, check out: Everything You Need to Know About Accepting ACH Payments.
While it’s fine to use the terms echeck and ACH interchangeably (or smashed right next to each other) under most circumstances, there are definitely ways some echeck payments can be fundamentally different from ACH transfers.
Accepting eChecks As Check 21 Payments
In 2004, a new federal law called the Check 21 Act went into effect. Through this law, paper checks can be “truncated,” meaning imaged and digitized into a substitute electronic form. The original paper copy is then removed (truncated) from the rest of the clearing process (although, banks can even go back and create a substitute paper check from the newly digitized version if they so choose).
The legalization of the check truncation process gave rise to the remote deposit capture technology boom of subsequent years. If you’ve ever deposited a check by an image of the front and back with a banking app on a smartphone for deposit purposes, for example, you’ve benefited from the convenience of this law.
It turns out that while Check 21 checks do get digitized to essentially become “electronic checks,” they do not necessarily get converted to ACH electronic fund transfers. Check 21 echecks may be processed, cleared, and settled via the traditional check system. You’re using a bank-to-bank digital file transfer service instead of an electronic fund transfer (EFT) through a middleman clearinghouse. eChecks that are not processed as ACH entries are governed by their own laws, consumer protections, and dispute rules that are separate from those outlined by NACHA. They can also have faster clearing times, but you’ll need to check with your bank or service provider for specifics.
As a business, you can sign up for a Check 21 echeck service that does not use the ACH system. You should specifically look for a Check 21 processor in this case, and you can start by asking at your current bank. Here’s a quick look at some of the differences between Check 21 and ACH:
|eChecks: Check 21 VS ACH|
|Eligible Items:||Business and consumer checks, cashier’s|
checks, money orders, etc.
|Business and consumer checks|
|Starting Material:||Paper check||Paper check or bank account info|
|Average Clearing Time:||Same-day or next-day||Same-day to approx. five days|
|Customer Opt-Out Possible:||No||Yes|
|Customer Dispute Time:||40 days||60 days|
|Customer Dispute Filing:||In-person at bank||In-person or by phone|
Note that some sources claim ACH is better for customers, while Check 21 is better for business owners. This really depends on your business type and circumstances as well as your specific customer base and how they like to pay. In truth, there are few hard-and-fast rules for using Check 21 versus ACH to process echecks, and some businesses may end up using both. However, common scenarios for each type of echeck include:
- Paper-check-heavy industries
- Businesses that also accept money orders, cashier’s checks, or other non-ACH-convertible items
- Businesses with customers who would opt-out of ACH processing
- Some mail order businesses
- Highly cashflow-sensitive businesses
- Businesses accepting large checks prohibited by ACH (>$25K, or >$100K as of 3/20/2020)
- High-risk merchants that don’t qualify for ACH acceptance (see more below)
- Recurring online payments
- Subscription products or services
- eCommerce websites
- Phone payments keyed into a virtual terminal
- Electronic invoicing
- Businesses already accepting credit cards
Accepting eChecks In High-Risk Industries
If you’re a high-risk business, you may not actually qualify for ACH processing in the first place. Setting up an ACH processing account requires its own underwriting process with stringent guidelines, similar to merchant accounts for credit card processing. For example, NACHA rules dictate that you must keep your ACH chargeback ratio below 0.5% and your ACH return rate below 15% or else risk account closure.
This is a tough situation for high-risk merchants. You may not want to use the Check 21 check truncation system and see your business bank account threatened by bounced checks, but you may not qualify for accepting credit cards or traditional ACH either. What to do?
This is where high-risk echeck processors come into play. Some of these specialized companies call themselves “echeck processors” for high-risk merchants in order to distinguish themselves from traditional “ACH processors” for low-risk, while others simply call themselves “high-risk ACH processors.” At any rate, when you receive an echeck using one of these processors, the funds are first deposited into an aggregate account held by the echeck processor. An aggregate account is a method of mitigating risk since the large volumes of transactions that are deposited into the account every month help offset any chargebacks or checks showing non-sufficient funds (NSF).
Once your funds have cleared, the echeck processor initiates an ACH transfer into your business account. Your primary business operating account is never put in jeopardy of a shutdown since your bank only ever sees perfectly cleared and settled ACH transactions.
If you’re a high-risk merchant interested in accepting echecks, we suggest talking to one of our recommended high-risk merchant account providers. They can help set you up with credit card processing, echeck processing, or both.
Finally, note that some merchants also benefit from extra check verification and/or check guarantee services. These are particularly important if you’re already high-risk and concerned about bounced checks, and especially if you’re only using a simple remote deposit capture feature for your paper checks. Ask your service provider if these features are already included or if they must be added on for a fee.
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|Review Visit Site||Review Visit Site||Review Visit Site|
General Purpose High-Risk, eCommerce, CBD Oil, Firearms & Ammunition, Adult, Credit Repair, Bad Credit, Vape/E-cigarettes, Airlines
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Advantages To eCheck Payment Processing
eChecks VS Paper Checks
If you’re still taking stacks of paper checks to the bank, here are some reasons to consider echeck payments instead (through ACH and/or Check 21):
- Save time
- Save paper, ink, fuel, and other resources
- Increase security
- Increase on-time payments with recurring ACH billing
- Auto-sync electronic check records with accounting and other business software
- Know the status of the transaction faster (whether the payment was declined/bounced)
eChecks VS Credit Cards
Because echecks and ACH bypass the card networks — and use their own systems and abide by their own set of rules — there are several advantages to echecks over credit cards:
- Lower cost to process (can also be lower than debit cards depending on your pricing model)
- Convert your recurring customers to a less expensive processing method
- Reduce declined recurring payments due to expired card information
- Harder for customers to file chargebacks
- Shorter period for customers to initiate chargebacks
- Increase reach to consumers who can’t or won’t use credit cards.
- Offer an additional payment method your competition may not offer
- Less fraud exposure
How To Accept eCheck Payments
When accepting echeck payment in a retail or restaurant environment, your starting material is typically a paper check. Therefore, you’ll need equipment that can digitally truncate the check to facilitate remote deposit, or scan the check and convert it to an ACH transfer. For Check 21, you must image both the front and back of the check. For ACH, you only need a simple check reader that reads and transmits the MICR code line at the bottom of the check at minimum. The amount of the sale can be entered manually.
Check readers and scanners can be used alongside simple card terminals or as part of fully-fledged POS systems. If your point of sale system already comes with check scanning capability, it’s very likely the check is being converted to an ACH entry, and your customer will need to e-sign or check a box for approval. Whatever equipment you end up using, be sure it’s tailored to the volume of checks you commonly accept in a given day or risk backing up the checkout line!
There are all kinds of ways to accept payments online — from sending an electronic invoice or payment link to a web form, to customers using your website’s shopping cart or payment buttons, to selling via online marketplaces and social media sites that include pre-integrated payment options. If echeck payment is offered in these cases, your customer is responsible for inputting the appropriate payment information for the echeck payment, and the payment goes through the ACH Network. The ACH transaction can be set up as a standing order for recurring billing or a one-time payment.
If you already accept credit card payments online, it’s relatively easy to add echeck acceptance by first turning to your current payment provider (whether you have a traditional merchant account or use a third-party processor such as Stripe) to see what they offer. If you don’t already have a card processor and don’t plan to accept cards at all, you can look for a dedicated echeck payment provider. Either way, you’ll also need a piece of software called a payment gateway that can handle ACH transactions. This software can usually be integrated into your current website if you have one.
For more information, check out: The Best Online ACH Payment Providers for eCommerce
eChecks On Mobile
On-the-go merchants who primarily use a smartphone or tablet paired with a credit card reader may also accept echecks. However, be careful to note that many mobile processing apps only act as organizational tools for checks, cash, and other forms of non-credit tender. Square is one example of this setup. These payment systems do not actually deposit echeck funds into your account — that part is still up to you to finish separately. In order to complete the echeck acceptance process fully within a mobile payments app, look for a specialized mobile echeck and/or ACH processor that’s equipped to handle the whole echeck process on mobile, all the way from acceptance to clearing and settling funds.
eChecks Over The Phone
Some merchants manually key-in echeck information they collect from customers over the phone into a virtual terminal on a computer. Of course, phone payments don’t involve a source document like a paper check, but they can still be processed as ACH debits. A recorded phone conversation with your customer counts as authorization for the ACH payment. These payments are technically a type of online payment since they’ll ultimately pass through a payment gateway for authorization. Still, virtual terminal payments do work differently than other online payments because the customer is not directly inputting his or her own information. You should make sure your payment gateway comes with an echeck-friendly virtual terminal for manual input.
eChecks Via Mail Order
Paper checks that arrive by mail can still be truncated for remote deposits or converted to ACH transfers. If you plan on creating an ACH transfer, you must provide notice on the invoice explaining this intent and give the option for your customer to opt out. A simple check scanner will come in handy, but if you process large quantities of checks by mail, you’ll want to invest in one or more check scanners or readers that can handle sizable stacks with speed.
How Much Does eCheck Processing Cost?
The cost to process echecks depends on several factors but still should cost less than credit card processing in the majority of cases. If you’re using a simple remote deposit capture setup without any conversion to ACH, you may be able to use a check scanner app on your phone or invest in check scanning hardware for higher volumes. These machines can cost several hundred dollars, but some banks may provide the scanner and charge a monthly fee instead. You could also incur a per-check fee.
If you’re dealing with ACH payments, you may need to be underwritten for an ACH processing account. This is similar to a merchant account for credit card processing, and the underwriting process will determine your rates and fees. Transparent providers often publish standardized ACH rates and fees that most lower-risk merchants will receive.
By contrast, some third-party processors allow you to add ACH without a stringent underwriting process. Third-party processors have their own set of pros and cons compared to standard merchant accounts, especially when it comes to the risk of an account shutdown.
eCheck Processing Rates
Here are some common rates you might see for echeck payments:
- Free up to a certain number/amount (for remote deposit capture)
- Free with credit card processing account
- Flat fee (average $0.20-$1.50 per transaction)
- Percentage fee (average 0.5%-1.5%)
- Flat fee + percentage fee
Note that any of these average figures may run higher for high-risk merchants. For merchants with larger average transaction sizes, a per-transaction fee (not a percentage) is generally the cheaper option.
Here’s a quick real-life example. Just last night I paid a lawyer fee of $7,000 online (ouch, right?). On the lawyer’s website, I had the option to pay by credit card or ACH. A credit card payment could easily cost this lawyer $200 in processing fees. If his ACH is set up on a percentage fee, perhaps he pays around $30-$100. If he has a good flat rate on ACH processing, however, he could be paying less than $1 to process my payment!
A common trap for merchants is to focus only on rates while overlooking other important fees. Watch for one or more of the following additional costs:
- Payment gateway Fee
- Setup/Application Fee
- Monthly Fee
- Equipment Fee
- Monthly Minimum Fee
- Batch Fee
- ACH Return Fee
- ACH Reversal/Chargeback Fee
- High Ticket Surcharge
- Expedited Processing Fee
- Check Verification
- Check Guarantee
- Refundable Deposit (e.g., for high-risk ACH)
Just as with credit card processing, it pays to shop around for the best overall deal. Also, pay close attention to the terms and conditions — including contract length and cancellation penalties — for echeck processing, which may be quite different from card processing.
eCheck Processing Time
If you’re looking to break funding speed records, ACH processing is probably not for you. Although recent and ongoing updates of NACHA’s rules have made same-day ACH clearing theoretically possible, it doesn’t always happen that you receive your funds the same day. With most ACH processors, you’re still looking at an average of three to five business days to receive your funds, and some may hold funds for an additional time period beyond that. On the plus side, you’re not looking at months and months of holding as you might with credit card processing funds.
All that said, ask your provider — sometimes the standard time is faster, or you can sign up for expedited funding for an additional fee. Funding from echeck remote deposit capture via Check 21 is usually quicker than for ACH conversions, with same-day or next-day being quite common (but again, you’re looking at increased risk with this direct setup if you don’t have additional check verification or guarantee services in place). Meanwhile, the aggregated ACH account providers we discussed earlier in our examination of high-risk echeck processing can make funds available quicker than if you had your own ACH account.
Final Thoughts: Are eCheck Payments Right For Your Business?
That was a whole lot of echeck information, so let’s quickly recap the key takeaways:
- Some echeck payments start out as physical paper checks, while others are initiated just with bank account information.
- Although both may be called “echecks,” truncated paper checks (provisioned by the Check 21 Act) used in remote deposits are different than checks converted to ACH transfer and are governed by different rules. Which type of echeck payment you accept depends on your business type and circumstances.
- Specialized echeck processors can help high-risk merchants safely process echecks by depositing the check into the processor’s own aggregated account and submitting an ACH transfer on the merchant’s behalf.
- eChecks present advantages over credit card processing (including lower processing rates and a more difficult chargeback procedure) but it can take longer to receive your funds.
- eChecks may be accepted by themselves or alongside credit cards, provided you have the appropriate software and/or check scanning equipment for your situation (phone, online, in-store, etc.).
- If you accept credit cards already, the first place to look to set up echeck acceptance is with your current processor. However, it pays to shop around for the best deal on echeck rates and fees.
We recommend that those who accept recurring payments or offer subscription products or services take a close look at adding echecks to their arsenal of payment acceptance methods as well as merchants who are already dealing with a lot of paper checks. If you accept paper checks at all, it’s also time to consider some form of remote deposit capture, whether through a mobile phone for small volumes or a countertop device for larger volumes. ACH payments (as distinguished from other electronic check payments that never go through the ACH Network) usually work best for online merchants.
eChecks and ACH might not sound all that modern but they’re still important in the modern world. Particularly if your close competitors are offering echeck payments, this might be the rare justification for keeping up with the Joneses. With the high cost of credit card processing for you and the demand for multiple payment options for your customers, echeck payment acceptance could be a good add-on or alternative for your business.